NEW YORK (CNNMoney)
A tax break that has saved struggling homeowners from paying thousands of dollars to the IRS is just days away from expiring.
If the Mortgage Forgiveness Debt Relief Act of 2007 does not get extended by Congress by the end of the year, homeowners will have to start paying income taxes on the portion of their mortgage that is forgiven in a foreclosure, short sale or principal reduction.
That means if someone owes $150,000 on their home and it sells for $100,000 in a foreclosure auction, they could owe taxes on the remaining $50,000. For someone in the 25% tax bracket, that would mean paying $12,500 in taxes on the foreclosure. Similar taxes would apply for amounts that were forgiven in short sales and principal reductions.
“Allowing the act to expire would harm these families and their communities and it would run counter to current loss mitigation efforts,” wrote Tim Pawlenty, president of the Financial Services Roundtable, Mike Calhoun, president of the Center for Responsible Lending, and John Dalton, president of the Housing Policy Counsel in a letter to the Senate Finance Committee.
So far, though, very little has been done to extend the act as Republicans and Democrats continue to butt heads over the fiscal cliff.
Many mortgage borrowers would be affected. More than 50,000 homeowners lose homes to foreclosure each month. Meanwhile, the number of short sales has tripled over the past three years to a rate of about half a million a year. And, under the terms of the $25 billion foreclosure abuse settlement, roughly one million borrowers may have their mortgage debt lowered through principal reductions over the next couple of years.
“If there ever was a no-brainer in housing policy, this would be it,” said Jaret Seiberg, a policy analyst for Guggenheim Securities.
Congress may return to the act after the other fiscal cliff issues are resolved, but by then the housing market will have taken a hit, said Elise Brooks Perkins, communications director for the Financial Services Roundtable. “It can be done retroactively, but the lag time will have a chilling effect on homeowners considering a short-sale,” she said.
Related: There’s a home price recovery but it’s really, really slow
Most short sellers will not follow through on sales to closing without debt forgiveness in place. Instead they’ll fight foreclosure, prolonging the housing crisis.
Congressman Brad Miller, however, said he doesn’t see debt forgiveness passing unless it’s part of a larger fiscal cliff deal.
Still, the price tag for such an exemption could make it a point of contention, said Seiberg. The office of Sen. Max Baucus, who heads the Senate Finance Committee, estimated the cost of a one-year extension at $1.3 billion.
Even if Congress allowed the mortgage debt forgiveness to expire, not all borrowers who lose their home to foreclosure, sell their home in a short sale or have their principal reduced will take a tax hit. If the debt is discharged in a bankruptcy, no tax is due. And anyone who is insolvent — meaning they have more debt than assets — at the time the debt was forgiven would not have to pay the tax.

As much as the government talks about staying out of housing, it can’t. President Obama is expected to unveil a new refinance plan today in Virginia at 10AM CST. Whatever plan it is, no one expects it to pass through Congress, IF Congressional approval is required. Recall that this plan was previewed by Obama during his SOTU address last week. The plan would allow non-agency mortgage holders (so those mortgages not backed by Fannie/Freddie) who are current to refinance into a lower-interest federally insured mortgage (via the FHA). Borrowers could qualify even if they had negative equity. The plan could help as many as 3.5M homeowners refinance. The plan is expected to cost ~$5-10B and Obama will call for a new fee to be charged to banks to pay for the proposal – because they have all the money, right?

I don’t know about you, but since history has a tendency to repeat itself rest assured, any and all costs will be passed onto the Homeowner.

Who wouldn’t these days! It seems like there are more questions than ever to ask regarding mortgages. My promise is to guide you through the information and to help you make an informed decision that will keep your life worry-free.

Buying a Home? These days it’s all about getting the “correct” loan for your situation. FHA, VA, CHFA, and conventional we have you covered. Together, we will develop a personalized loan that will give you peace of mind and a plan to follow when the speed-bumps in life come along.

Curious about Refinancing? I can explain the process and what you can expect from it. The benefits of refinancing include a reduced interest rate and monthly payment, and possibly a plan to help you pay down your balance more quickly. Fannie Mae and Freddie Mac have made it possible to refinance even when your short on equity.

Looking to Leverage Your Home’s Equity. Now more than ever if you have equity in your home its a good time to use that equity to buy investment properties. With rates and home prices at an all time low why not cash in and pick up some investment properties. We will show you how. I can explain how the process works and what you can expect.

The Administration has just announced a major expansion to the Home Affordable Refinance Program (HARP) in an attempt to help more homeowners by enabling them to refinance high loan-to-value mortgage loans at current low interest rates. The changes are effective in a few weeks and tens of thousands of homeowners will be eligible for this new program.

To qualify for the enhanced HARP, the existing mortgage loan of a borrower must be owned or guaranteed by Fannie Mae or Freddie Mac and the current balance of the mortgage must exceed 80 percent of the value of the property. The homeowner must also be current on the loan at the time of the refinance and must not have had a late payment on the mortgage in the past six months or more than one late payment in the past 12 months.

The most important enhancement to this program is the removal of the loan-to-value ratio cap for eligible mortgages. Originally, any mortgage that exceeded 125% of the value of the property was not eligible. Now the loan can exceed 125% of the value. This change makes tens of thousands of homeowners eligible to refinance at today’s record low interest rates. Even better, Fannie Mae and Freddie Mac are eliminating certain loan fees to make the refinances even more attractive.

Want to know if you are eligible for this great new program? First Step is to check to see who owns your home. It must be either Fannie Mae at http://www.fanniemae.com/loanlookup/ or Freddie Mac at https://ww3.freddiemac.com/corporate/ . Remember what I said in an earlier post? Even if you are not comming up on their website does not mean they don’t own your loan. You may need to call your lender direct and ask them, “Who owns my loan?”

If you are still having trouble and need some assistance, the team at Centurion Mortgage is great. They are always happy to help and can walk you through the never ending maze which we call home lending. If you are interested the assistance is free and there is no obligation for the review. They do suggest you act quickly because lenders are likely to get inundated as soon as the word gets out that the pricing should be better and there is no cap on your equity position. Not to mention you never know how long these record low rates will last.

HARP stands for Home Affordability Refinance Program. It is basically a stimulus package brought to you by the Obama Administration. The main crux of “HARP” is to be able to help homeowners refinance their property even if there is no equity. So basically it goes like this.

I am a homeowner who has been making my house payments on time for the last twelve months. My interest rate is 7%! I want and need to refinance my home but to do so is a nightmare. Why? Well the banks do not want to refinance to someone like me who has no equity in their property. I can’t find out home much equity I have because banks will not take an appraisal from an appraiser I call. In Fact the only time I am allowed to speak to an appraiser is when the bank orders it directly and they come knocking on my door to appraise my home. This new way of doing business went into effect the beginning of 2011 with the new legislation that our wonderful Congress enacted. So even if I found a competent appraiser that indicates I may have some equity the bank will not use my appraiser only their own approved appraisers.

The second obstacle I face may be mortgage insurance. If my property has any equity but less than 20% the lenders require mortgage insurance to cover them in case I default on my loan. Granted I have been making my house payments on time for the last 13 years but because my value has gone down mortgage insurance is required. However that is only if I have some equity, if I owe more than the property is worth. Lenders will not give me a loan regardless of how high my fico score is or my income.

This is how and why HARP came to be. The premise behind HARP is that as long as I have made my house payment on time for the last twelve months and I have good credit (most lenders require 640 fico score or higher) and my loan is not more than 125% of the value they lender will refinance my home. Sounds simple enough, however the banks don’t allow anything to be too simple, maybe they like the fact that I am paying them 7% whereas if I refinanced I would be able to drop my rate to 4%.

Bottom line is the program is not a mandate from the Obama Administration. Obama allows the banks to opt in to the program. To be eligible your loan must be owned by Fannie Mae or Freddie Mac. If your loan is owned by one of these two agencies than the majority of lenders will refinance your home up to 125% of the value.

Certain restrictions apply and not every home that is owned by Fannie and Freddie show up on their websites so a call to your current lender is of course needed. If you are needing and wanting to refinance and need some assistance putting it together contact the talented team at Centurion they can be reached at http://www.CenturionMF.com or drop them a line at 562-533-5600. They can help you see if you will qualify and reduce your monthly house payment.